“Competitive strategy is about being different. It means deliberately
choosing to perform activities differently or to perform different activities
than rivals to deliver a unique mix of value.” - Michael E. Porter
Why Study Competitive Forces?
- To determine attractiveness of industry
- To take decisions on product/market strategy
Strategic implications of the
five competitive forces
Competitive environment
is unattractive from the viewpoint
of earning good profits when
the rivalry is vigorous, entry barriers are low and entry is likely,
competition from substitutes is strong, suppliers and customers have
considerable bargaining power.
Analyzing the
five competitive forces: How to do it?
Step 1: Identify
the specific competitive pressures
associated with each of the five forces
Step 2: Evaluate
the strength of each competitive force
-- fierce, strong,
moderate to normal, or weak?
Step 3: Determine
whether the collective strength
of the five competitive forces is conducive to make attractive profits
1. Barriers
to entry
This refers to the threat new competitors pose to existing
competitors in an industry. A profitable industry will attract more competitors
looking to achieve profits.
When is the
threat of entry stronger?
There’s a sizable pool of entry candidates; entry barriers
are low; industry growth is rapid and profit potential is high; incumbents are
unwilling or unable to contest a newcomer’s entry efforts; when existing
industry members have a strong incentive to expand into new geographic areas or
new product segments where they currently do not have a market presence.
When is the threat of entry
weaker?
There’s only a small pool of entry candidates; entry
barriers are high; existing competitors are struggling to earn good profits; industry’s
outlook is risky.
2. Threat of
substitutes
A low threat of substitute products makes an industry more
attractive and increases profit potential for the firms in the industry, while
high threat of substitute products makes an industry less attractive and
decreases profit potential for the firms in the industry.
When is the competition from substitutes
stronger?
There are many good substitutes that are readily available;
the lower the price of substitutes; the higher the quality and performance of
substitutes; the lower the user’s switching
costs.
When is the competition from substitutes
weaker?
Substitute product is more expensive than industry product; Substitute product
quality is inferior to industry product quality; Substitute performance is
inferior to industry product performance; No substitute product is available
1 3. Bargaining
power of buyers
Bargaining power refers to the pressure consumers can exert
on businesses to get them to provide higher quality products, better customer
service, and lower prices. When analyzing the bargaining power of buyers, the
industry analysis is being conducted from the perspective of the seller.
When is the bargaining power of buyers weaker?
When buyers purchase item infrequently or in small
quantities; buyer switching costs to competing brands are high; surge in buyer
demand creates a “sellers’ market”; seller’s brand reputation is important to
buyer; a specific seller’s product delivers quality
or performance that is very important to buyer; buyer collaboration with
selected sellers provides attractive win-win opportunities.
When is the bargaining power of buyers stronger?
When buyers switching costs to competing brands or
substitutes are low; buyers are large and can demand concessions; large-volume
purchases by buyers are important to sellers; buyer demand is weak or declining;
only a few buyers exists; identity of buyer adds prestige to seller’s list of
customers; quantity and quality of information
available to buyers improves; buyers have ability to postpone purchases until
later; buyers threaten to integrate backward
2 4. Bargaining
power of suppliers
Supplier power refers to the pressure suppliers can exert
on businesses by raising prices, lowering quality, or reducing availability of
their products.
When is the bargaining power of suppliers weaker?
When the item being supplied is a commodity seller
switching costs to alternative suppliers are low; good substitutes exist or new
ones emerge; surge in availability of supplies occurs; industry members account
for a big fraction of suppliers’ total sales; industry members threaten to integrate
backward; seller collaboration with
selected suppliers provides attractive win-win opportunities
When is the bargaining power of suppliers stronger?
Industry members incur high costs in switching their
purchases to alternative suppliers; needed inputs are in short supply; supplier
provides a differentiated input
that enhances the quality of performance of sellers’ products or is a valuable
part
of sellers’ production process; there are only a few suppliers of a specific
input; some suppliers threaten to integrate forward.
3 5. Rivalry
among existing players
This refers to the extent to which firms within an industry
put pressure on one another and limit each other’s profit potential.
What causes rivalry to be stronger?
Competitors engage in frequent and aggressive launches of
new offensives to gain sales and market share; slow market growth; number of
rivals increases and rivals are of equal size and competitive capability; buyer
costs to switch brands are low; industry conditions tempt rivals to use price
cuts or other competitive weapons to boost volume; a successful strategic move
carries a big payoff; diversity of rivals increases in terms of visions,
objectives, strategies, resources, and countries of origin; strong rivals
outside the industry acquire weak firms in the industry and use their resources
to transform the new firms into major market contenders.
What causes rivalry to be weaker?
Industry rivals move only infrequently or in a
non-aggressive manner to draw sales from rivals; rapid market growth; products
of rivals are strongly differentiated
and customer loyalty is high; buyer costs to switch brands are high; there are
fewer than 5 rivals or there are numerous rivals so any one firm’s actions has
minimal impact on rivals’ business.
